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Compensation: Benefits, wages, taxes. Employee Benefits as a Percent of Compensation. TABLE 5.3 Employee Benefits as a Percentage of Total Compensation, 1999 (Average Yearly Cost in Parentheses). Characterization of Market.

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Compensation benefits wages taxes

Compensation: Benefits, wages, taxes

Employee Benefits as a Percent of Compensation


TABLE 5.3 Employee Benefits as a Percentage of Total Compensation, 1999 (Average Yearly Cost in Parentheses)


Characterization of market
Characterization of Market

Indifference curve: Combinations of benefits and wages that yield the same level of utility

Isoprofit line: Combinations of benefits and wages that yield the same level of profit


Applications
Applications

Cafeteria Plan

Profit sharing vs. Wages

Diversification

Employee Stock Ownership Plans (ESOP)

Polaroid employees give up 8% of salary for ESOP

Stock valued as high as $60, closes at $.09 in 2001.


JDI: Job Descriptive Index; MSQ: Minnesota Satisfaction Questionnaire

Source: Heneman, Schwab, Fossum and Dyer, Personnel and Human Resource Management, 1989.


Applications1
Applications Questionnaire

Pay for performance ~14% of compensation

Commissions

Piece work

Bonuses

Piece rate workers earn more than straight time paid workers

Does this mean piece rates motivate?

Why aren’t piece rates more common?


Performance bonds and deferred compensation
Performance bonds and deferred compensation Questionnaire

WAGE

MRP

Deferred compensation

BOND


Performance bonds and deferred compensation1
Performance bonds and deferred compensation Questionnaire

L = value of leisure

W = Wage

= MRP if don’t shirk

T*


Performance bonds and deferred compensation2
Performance bonds and deferred compensation Questionnaire

Return from shirking:

At time T*: L+W if shirk and are not caught: Shirk if L + (1-P)*W > W

: L if shirk and are caught If P < 1, shirk at T*

: W if don’t shirk

P = probability of being caught shirking

L

W

T*


Performance bonds and deferred compensation3
Performance bonds and deferred compensation Questionnaire

More generally: return from shirking:

PV(W) = present value of wage stream

PV(L) = present value of leisure consumption

Shirk if PV(L) + (1-P)*PV(W) > PV(W) or PV(L) > P*PV(W)

L

W

T*


Performance bonds and deferred compensation4
Performance bonds and deferred compensation Questionnaire

Shirk if PV(W) or PV(L) > P*PV(W)

As time T*, PV(W) gets smaller relative to PV(L) which means people will start to shirk, which means that true MRP will be less than W

L

W = MRP without shirking

MRP with shirking

T*


Performance bonds and deferred compensation5
Performance bonds and deferred compensation Questionnaire

Make sure PV(W) = PV(MRP)

Rationale for Mandatory retirement

WAGE

MRP without shirking

Deferred compensation

BOND

T*


Applications2
Applications Questionnaire

Defined Benefit Pension Plans

Employee Retirement Income Security Act (ERISA)

Pension guaranteed by the Pension Benefit Guarantee Corporation

Pension underfunding

PBGC at risk for insuring $450 billion of underfunded private pensions

Current public sector underfunding $700 billion (more than all state and local property, sales and corporate tax)



Who Made the Biggest Bucks? QuestionnaireWall Street Journal April 10, 2006

Richard D. Fairbank, Capital One Financial Corp $249.27 Shareholder return: 2.7%.

Bruce Karatz, KB Home, $155.9 million. Shareholder return: 61%.

Henry R. Silverman, Cendant Corp., $133.26 million. Shareholder return: -21%.

Richard S. Fuld Jr., Lehman Brothers Holdings Inc., $104.4 million. Shareholder return: 51.6%

William E. Greehey, Valero Energy Corp., $95.16 million. Shareholder return: 128.5%.

Ray R. Irani, Occidental Petroleum Corp., $83.96 million. Shareholder return: 38.8%.

Lawrence J. Ellison, Oracle Corp., $74.37 million. Shareholder return: 12.3%.


Tournaments

Firm 1 Questionnaire

CEO $200,000*1

Exec VP $150,000*6

VP $100,000*12

Total $2,300,000

Expected Value of competing

VP to EVP = .5*50,000

= $25,000

EVP to CEO= .167*50,000

= $8,333

Firm 2

CEO $560,000*1

Exec VP $130,000*6

VP $80,000*12

Total $2,300,000

Expected Value of competing

VP to EVP = .5*50,000

= $25,000

EVP to CEO= .167*430,000

= $71,810

Tournaments

Why bother?


Tournaments1

Firm 1 Questionnaire

CEO $200,000*1

Exec VP $150,000*6

VP $100,000*12

Total $2,300,000

Expected Value of being VP

= 100,000 + .5*150,000 +

(.5)*(.167)*200,000

= $191,700

Expected gain from competing = $91,700

Firm 2

CEO $560,000*1

Exec VP $130,000*6

VP $80,000*12

Total $2,300,000

Expected Value of being VP

= 80,000 + .5*130,000 +

(.5)*(.167)*560,000

= $176,760

Expected gain from competing = $96,760

Tournaments


Forbes magazine ceo survey of the 800 largest publicly held firms
Forbes Magazine CEO Survey of the 800 largest publicly held firms

Of 800 CEOs

26 Founders

Of 774 firms not run by founders

694 (90%) internal promotions

80 (10%) external hires


Tournaments2
Tournaments firms

Why should you have larger raises as job level rises?

  • Probability of promotion gets smaller

  • Number of future contests decreases

    No further option for CEO except moving to bigger firm


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